Q1 Semiconductor Sector Update

Note: This post is from my occasional contribution to the Global Semiconductor Association (GSA) quarterly newsletter, which can be found at http://bit.ly/iiKsuwIt is difficult to succinctly characterize Q1 of 2011 regarding the semiconductor sector; perhaps "a cold listless winter with signs of a vibrant spring" does the trick. The numbers of private financings was basically flat versus the previous quarter, with seed and first rounds coming in at just one reported by GSA (and maybe two to three others of which I am aware). But with later stage rounds dominating the scene again, more than just a glimmer of good news can be found in the number of "offensive" financings (i.e., new investor-led, larger rounds — more than half by my analysis). And while IPO pricing activity was down (three in Q1 2011 versus eight in Q4 2010), perhaps the most encouraging sign of a potential thawing for private companies was the upswing in M&A activity. Of the 21 M&A transactions of private companies, by my count, at least three of them (CHiL, SiTel and Provigent as the biggest of the bunch) represented positive returns on substantial multi-round fundraising.I remain encouraged by the potential for outsized VC-type returns on early-stage semiconductor investments. But two obstacles remain in center focus: the ability for start-ups to raise subsequent rounds of financing at increased valuations and positive liquidity (M&As and IPOs). The former, interim private follow-on investments, remains elusive, especially for Series B companies — still early in their evolution with development and market risk squarely on the table with less quantifiable evidence. This is why the initial financing strategy for semiconductor start-ups is so crucial and why we encourage our companies to syndicate broadly to build strong inside investor bases to carry them through their early "death valley" traverses. The importance of the latter issue, positive liquidity, is self-evident. And with attractive exits will come the flywheel effect of easier and more plentiful interim round financings. Eyes are trained on the IPO pipeline, which remains robust, and the post-IPO performance, which remains volatile. In the meantime, VC investors are starting to take greater chances with potentially industry-changing challengers to the status quo. Sectors worth watching include the next-generation field-programmable gate array (FPGA) space — with companies like Tabula and Achronix (stunning large later stage financings); the scale-up data center compute space — with companies like Calxeda (I am an investor) and Tilera; and the consumer sensor space — with PrimeSense as the prime example. With spring in the air and my beloved Red Sox starting to win games (at last), perhaps a baseball analogy is fitting. In the VC-backed semiconductor sector the at-bats may be fewer, but for those of us continuing to invest in the sector, we're swinging for home runs and our batting average has signs that point to it getting better.